How Banks Can Use Behavioral Economics to Hook Customers
By J. Marc Ward
Humans can be horrible decision-makers, which is apparent in the way they spend money. For example, a college student that makes $200 from mowing lawns may likely spend that hard-earned money on essentials like food and rent. However, if that same college student wins a $200 Visa gift card for simply responding to a survey, she may be tempted to spend it on a frivolous treat. Humans tend to treat money differently when they earn it differently. Behavioral economics explains why humans make illogical spending decisions. Lately, some mobile banking apps have used insights from behavioral economics to win over customers and make them more financially savvy. This article looks at some of the ways behavioral economics can be used for banking services.
Setting Up a Budget
Behavioral economics lesson: Humans tend to make better decisions for the future than they do for today. Think about it—when you are planning a grocery list for next week, what do you choose for your snacks, fruit or candy bars? Many people would likely say fruit. Compare that to a last minute snack decision. You may be more tempted to pick the candy bar.
Strategy: Budgets work the same way. People want to save for retirement, emergency funds and their kids’ college fees, but when they are at the counter, they tend to pick the candy bar. That is where banks can step in. Banks can offer services that help customers make better spending decisions. Budget services connected to checking and savings accounts are a good first step towards implementing behavioral economics in your bank.
Linking Spending and Saving Tips to Mobile Apps
Behavioral economics lesson: People are more likely to do something if they have to opt out rather than opt in.
Strategy: Have opt-out budget reminders delivered through a mobile banking app. If customers are using your budget services online, set up a system that sends reminders for the week about how much they can spend to remain on budget. On the accounts screen of the mobile app, add savings goals (with suggestions, like “Hawaii Vacation” or “Emergency Fund”). When paychecks are deposited, send notifications asking the customer if they would like to put $20 of their paycheck towards their Emergency Fund. Include useful reminders in the default settings of mobile banking app to help customers spend and save. Customers can opt out of setting up a savings goal, but having a default “Emergency Fund” gets people thinking that they should have an emergency fund, so they are more likely to use it. Plus, these notifications are a great way to give customers an “personalized” experience that is entirely automated.
Making Spending and Saving Enjoyable
Behavioral economics lesson: Spending money lights up the same areas in the brain as physical pain. Saving money is much more pleasurable.
Strategy: Banks can set their mobile apps up to reduce the pain of spending and increase the joy of saving. For example, a bank can send customers that have extra money in their budget a notification congratulating them on being under budget and listing their surplus. The notification could either tell the customer that they have earned the ability to spend that amount, or allow the customer to transfer that amount into one of their savings goals.
By integrating mobile banking app budget services like the ones mentioned above, you can create a more rewarding experience for your customers, as well as help make them more financially savvy.